High Incidences of Carveouts May Affect Cramdowns

Over one-third of outstanding U.S. prime and Alt-A credit RMBS may have bankruptcy carveouts, Fitch Ratings found as part of its review of the cramdown legislation's potential effects on current RMBS transactions.

Deals with carveouts allocate certain bankruptcy losses in atypical ways that tend to vary. Fitch found about 29% of prime deals and 46% of Alt-A transactions have bankruptcy carveouts.

These carveouts allocate the amount of the bankruptcy loss to bonds in reverse sequential order in amounts ranging from about $100,000-$400,000, Fitch said.

"Bankruptcy losses in excess of this limit are then allocated, pro rata, across the capital structure," the rating agency said.

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